Staying a Winding Up Application Based On An Adjudication Award [Insolvency Law] [Construction Law]

In the unreported Singapore High Court decision in Strategic Construction Pte Ltd v JH Projects Pte Ltd [2017] SGHC 238 (the “Judgment”) (available on Singapore Law Watch here), the Singapore Court considered whether to stay a winding up application brought by the Plaintiff (“SCPL”) against the Defendant (“JHP”).

SCPL’s application was premised on an adjudication award (“AA”) granted in SCPL’s favour pursuant to the Building and Construction Industry Security of Payment Act (Cap. 30B) (“SOPA”).

The Court granted JHP’s application for a stay pending the disposal of a separate suit (the “Suit”) it had commenced against SCPL, on the basis that it had a genuine cross-claim against SCPL arising out of the subject matter of the Suit. It bears mentioning that the factual basis of the AA was separate and distinct from that giving rise to the Suit.

In granting the stay, the Court considered several issues, the salient ones being:-

What the legal test to be applied to grant a stay in such circumstances was;

Whether the cross-claim brought by JHP had to arise out of the same contract to obtain a stay; and

Whether claims under SOPA, namely the AA, were to be treated any differently from other claims in the context of Singapore’s insolvency law regime.

This article elaborates on the Court’s reasoning in relation to the issues above, and provides a commentary regarding one of the elements necessary to obtain a stay in these particular circumstances.

Applying to Stay A Winding Up Application

At [17] of the Judgment, the Court endorsed the approach adopted by the Court of Appeal in Metalform Asia Pte Ltd v Holland Leedon Pte Ltd [2007] 2 SLR(R) 268 (“Metalform“), where the Court held – in a context of an application to stay winding up proceedings – where winding up orders had yet to be made.

In this respect, a distinction was drawn between the applicable legal test where a winding up order has already been made as opposed to the position where the application is lis pendens.

In substance, to obtain a stay – it must be:-

“shown [that there was] was a likelihood that the winding-up proceedings may fail or that it is unlikely that a winding-up order would be made”: see [19] of the Judgment.

This may be proven by the entity against whom the winding up proceedings are being brought against by demonstrating that it has a serious cross-claim based on substantial grounds; defendant need not show that it is not insolvent: see [23] of the Judgment.

In order to obtain a stay, three (3) criteria must be met, namely:-

The debtor has a genuine cross-claim;

It can be demonstrated that the cross-claim is greater than the claim of the creditor seeking the winding up; and

there are no special circumstances.

It was discussed, albeit in obita dicta, that a fourth requirement be met – namely that to show that the cross-claim is genuine, that the debtor must have been unable to litigate the cross-claim prior to the winding up petition.

On the facts before the Court – Justice Tan Siong Thye held that JHP had satisfied the requirements and was therefore entitled to a stay.

Basis Of Cross-Claim And The Treatment Of An AA In Insolvency

The Court further held that the cross-claim in question need not arise out of the same contract in order to obtain a stay of a winding up application. The Court reached this conclusion on the basis that there was nothing in either the Companies Act (Cap. 50) or in the common law which imposed such a criteria in the context of winding up proceedings.

Insofar as whether adjudication awards provided given under SOPA were concerned, SCPL sought to argue that such awards ought to be treated differently given the legislative intention behind the enactment of SOPA, namely the swift and effective resolution of payment disputes. On this basis, SCPL sought to argue that JHP ought to satisfy the AA before it ought to be permitted to continue its Suit against SCPL.

“…in the area of insolvency, there is a higher justice that must be served. There is an established priority of payments that have to be made to different parties who have suffered as a result of a party going insolvent. So this priority should not be upset just because of the payment woes in the construction industry. So we have therefore left insolvent cases alone so as not to disrupt a process which is working well.”

As such, awards under SOPA did not enjoy any priority above and beyond what their relative value would have been in insolvency, as:-

“…Parliament had already considered that a claim under SOPA might potentially conflict with a claim under the insolvency regime. It had expressly intended that the latter would prevail in such situations because the insolvency regime had far-reaching consequences, including that of preferring certain creditors over others due to their security over the company’s assets. Allowing SOPA claimants to intrude into this regime would unnecessarily tilt the balance in favour of the construction industry over other creditors. This was an intrusion that Parliament was unwilling to endorse. Accordingly, even though the policy underlying SOPA is expeditious dispute resolution for quick cash flow, it cannot override the scheme under the Companies Act, which gives a company that is the subject of winding-up proceedings a chance to prove its cross-claims before a winding-up order is made and the attendant consequences flow, if it can show that there is a triable issue as to the cross-claim“: see [57] of the Judgment.

In this author’s view, there is a strong basis for this rationale as any money paid into Court by the defendant to SOPA proceedings in order to appeal the AA is considered as “security“: see Section 27(5) of SOPA.

Such payment into Court effectively converts an AA – which is unsecured – into a potentially secured claim where that party succeeds in defending the AA, since money paid into Court is generallyconsidered as creating security over such monies in favour seeking and/or entitled to have such monies paid.

It is therefore surprising that, notwithstanding the grant of the stay, the Court nonetheless directed JHP to pay the AA amount into Court as a condition for it to continue its proceedings in the Suit. This may effectively have the legal effect of “ring-fencing” such monies paid into Court for the benefit of SCPL, regardless of the outcome of the Suit.

Commentary

Another issue not considered relevant in the present circumstances was whether the debtor needed to show that it was not insolvent in order to obtain a stay. The Court held that this was unnecessary, as this condition was only imposed in situations where a winding up order had already been made on the grounds of insolvency: see [19] of the Judgment and Phang Choo Ong v Gilcom Investment Pte Ltd (LRG Investments Pte Ltd and another, non-parties) [2016] 3 SLR 1156.

This author is of the view that the solvency of the debtor may be a relevant factor taken into consideration in determining whether there are “special circumstances” which exist in deciding againstthe granting of a stay, even in the context of winding up applications which are lis pendens.

However, what the Court ought to consider is whether the insolvency (or deemed insolvency) of the defendant to the winding up proceedings was brought about by the actions and/or omissions of the person / entity bringing the winding up application.

If the plaintiff in a winding up application is the cause of the defendant’s insolvency – disregarding all other claims that the defendant may be faced with – it should not be the case that the defendant to the proceedings should have to prove its solvency as a basis for the granting of a stay, whether before the winding up order is made or after.

10 October 2017

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